If you’ve just recently started investing, the sight of so many asset classes can seem overwhelming. Which ones will help you diversify your portfolio? Should you start by putting your money into one or several? What’s the risk of each one?
Before you invest, learn about the different asset classes and what each can offer you. Specifically, your choice of asset class should be based on your risk tolerance and investment goals. Let’s talk about asset classes so you can start investing in an asset class with confidence.
What is an Asset in Investing?
In investing, an asset provides some benefit to the company, country, or person that owns it. It is an economic resource that increases revenue, decreases cash outflow, or promotes growth and expansion.
A company may produce certain assets that investors then purchase. For example, if a mining company mines a large quantity of gold, it can sell that asset to investors in precious metals.
Individual assets fall into different asset classes based on their characteristics—these investment classes group together as an asset class that carries a similar risk to the investor.
Investing in different types of bonds means risking inflation and credit. Assets in this class have lower liquidity than what you’ll find in commodities. Conversely, many people invest in real estate for its long-term cash benefits.
Many investors diversify by investing in different asset categories. Investing in more than one asset class also lowers your risk since one asset may suffer while another grows.
One asset class isn’t necessarily better. Instead, different asset classes offer opportunities to increase your wealth. Regardless of how you invest, your asset class should correspond with a level of risk that makes you comfortable.
Types of Assets/Asset Classes in Investing
You can divide assets into five distinct asset class categories based on investment characteristics. These include stocks, fixed income, cash equivalents, commodities/real estate (tangible assets), and futures/options.
When you buy stock, you purchase a share of a specific company. The number of shares a company has depends on the size and worth of the company, and the quantity you buy depends on availability and price.
Many beginning investors start with stocks because they make an excellent long-term investment. People who bought shares in major companies like Microsoft or Apple when they first started have seen their stocks’ values appreciate over the years.
For instance, you can buy and sell stocks on a stock exchange (like the Toronto Stock Exchange (TSX) and NASDAQ Canada) using an online broker.
Most investors regard fixed-income investments as a lower risk due to their interest return and low liquidity. Assets in this class come in the form of bonds and exchange-traded funds (ETFs).
With fixed income, you essentially invest in debt, like government bonds. You lend money to the institution, and it pays you interest periodically for as long as you own the bond. Bonds’ low risk comes from these guaranteed payments, which you won’t find in other assets like stocks.
Many investors buy bonds using ETFs through bonding holdings like BMO Aggregate Bond Index ETF and iShares DEX Universe Bond Index Fund.
Cash equivalents and money market instruments have two advantages: liquidity and accessibility. Those benefits make them ideal for short-term investing.
Investors classify money market instruments as current assets, meaning they usually expect to sell them within one year. This asset class represents cash in the form of physical currency, like coins.
While they are liquid assets, they also have a set market price. They also compare well to other asset types since companies with cash equivalents are usually better able to pay debts.
A good example of this is GICs (Guaranteed Investment Certificates) – a type of investment that pays a guaranteed interest rate. It’s one of the safest investments you can make, and you’ll usually get a higher interest rate (usually above 1.5%) than just sticking into a savings account (or under your mattress). It’s also easy to set up: all you have to do is deposit the money into a GIC account. Your investment is usually then “locked-in” for a set period of time (anywhere between 30 days to 5 years), and once it matures, you can either reinvest the sum or cash it out.
Just make sure to shop around for the best GIC rates in Canada before pulling the trigger. Our top choice is EQ Bank because it has no fees, a low minimum deposit requirement of $100, and flexible terms ranging from 30 days to 10 years.
Commodities and Real Estate
Commodities, combined with the real estate asset class, are tangible assets. While these two asset class categories are similar, they function differently.
Both involve owning a physical asset. For example, when you own real estate, you own a home that you may rent to tenants. Buying commodities, in comparison, can mean owning livestock or metals like gold and silver.
Tangible assets have much higher liquidity than other assets, like bonds. They often survive inflation, meaning they can prove excellent long-term investments. Given how many types of commodities and real estate you can find, they’re also a great way to diversify your portfolio.
Futures, Options, and Forex
Some investors classify futures as a trading method rather than a separate asset class since you can find futures contracts, options, and forex trading in any other asset class.
When you trade futures, you agree to buy a specific asset later at a designated price, which remains constant, regardless of whether the market price of the asset rises or falls.
“Options” allows the buyer or seller to trade assets within a specific timeframe but doesn’t force them to do so as futures contracts do.
Foreign exchange trading (or “forex”) works with exchanging currency on an international market. However, in forex trading, you buy another currency equivalent to the one you want to trade.
Before you trade forex in Canada, you must register with the Investment Industry Regulatory Organization of Canada (IIROC). With Questrade, you can trade forex with ease. They give you competitive pricing on more than 110 currency pairs and their target spreads are as little as 0.8 pips (assuming market conditions are normal).
Asset Allocation Explained
Before you invest your cash, you should work with a financial advisor or use a robo advisor to determine your investment strategy. Investment strategies will help you decide which asset class poses the lowest risk and greatest possible benefit to you.
When deciding how to allocate your assets, consider your time horizon, and risk tolerance. Some asset classes, such as cash equivalents and bonds, work better as short-term investments.
With a short-term asset class, you may need quick cash and look for assets you can buy and sell quickly. On the other hand, real estate offers a market that fluctuates with inflation but outlasts other asset types.
Risk tolerance works with your time horizon to determine how much money you can afford to lose if your investments depreciate. No investment comes without risk, but you’ll see more uncertainty with options than bonds.
With high-risk tolerance, you may see better returns later, but that won’t matter if you can’t afford to lose money. However, you can mitigate some of that risk by diversifying your assets.
If you invest in different asset classes, you are less likely to see each of your investments fall at once. Sometimes, conditions that cause one asset’s value to fall will bode well for another. Consider balanced investment strategies to minimize your losses.
A robo advisor like can help you with this. All you have to do is complete an online questionnaire and the computer’s algorithm will recommend a balanced, diversified portfolio that matches your risk tolerance. It takes mere minutes, and if your circumstances change, you can always repeat the exercise and tweak your portfolio to align with your financial reality.
Or if you’re a DIY investor, you can use a low-cost online broker like Questrade that allows a low cash investment. Questrade provides $50 of free trades right away and charges lower commissions than most Canadian competitors.
What Asset Classes Should You Pick to Build Your Portfolio?
Your investment assets will determine the type of portfolio you build over time. In general, most people choose between three types:
- Aggressive: Aggressive investment portfolios allow for a higher level of risk and often include long-term assets. Many people who use aggressive investment strategies have more long-term investments, like stocks and equities, and fewer bonds. These portfolios also aim for high returns in the long run rather than immediate value.
- Moderate: Moderate portfolios keep more balance between each asset class. Stocks usually take up about half of these portfolios, dividing the other half between fixed-income securities and cash equivalents.
- Conservative: Conservative portfolios work well for beginners and people who want low-risk investments. They often invest up to 75% in bonds while the rest goes to more liquid assets.
Although many investors choose one of these three portfolio types, not everyone invests in the same asset classes. The ones that work for you will depend on your goals, risk allowance, and time horizon.
How to Invest in Asset Classes
There are two easy ways you can invest in asset classes: either as a DIY investor or by using a robo-advisor. Let me break this down:
Option 1: DIY Investing with an Online Brokerage
To cut costs to the bone, you can DIY invest with an online brokerage. For instance, Questrade offers free ETF purchases and stock trading for as little as $4.95, and as a new client, you can get $50 in free trades.
Another good option is — a mobile-only app that allows clients to buy and sell stocks and ETFs for free. Now is a great time to sign up because Wealthsimple Trade is offering Young and Thrifty readers an exclusive deal: and $0 commission trades when you open a new Wealthsimple Trade account. All you have to do is fund at least $150. Plus, Wealthsimple Trade will reimburse an outgoing administrative transfer fee of up to $150 on investment account transfers valued at more than $5,000.
Since you’re flying solo, it will require some patience and research, but here are some steps to getting started:
1. Decide what your asset mix will be
You don’t want to put all of your eggs in one basket, and you also have to determine your risk tolerance. I recommend investing the largest portion of your portfolio be in stocks, with varying degrees of other asset classes based on your financial goals and risk tolerance.
The easiest way to do this is by taking 110 and subtracting your age (if you’re a more aggressive investor, you can use 120). This will give you the percentage of your portfolio that should be invested in stocks.
So, for example, if you’re 35, you should have about 75% of your money in stocks (110 – 35 = 75). The rest should go into bonds, cash equivalents, or other “safer” investments.
2. Determine what specific investments you want to buy
After you decide your asset class mix, spend time researching the specific types of investments within that asset class to make sure they align with your investment philosophy and risk tolerance. If you’re buying stocks, you may want to do a deep dive into the best ETFs to buy in Canada. Again, since you don’t put all your eggs in one basket, so ETF investing will ensure you have a diverse mix of stocks. If you’re stumped, take a look at The Best Investments in Canada.
3. Plan a buying strategy
In a perfect world, you’d have enough money to kickstart your portfolio and to buy the perfect percentage of asset classes. But it’s not a perfect world, and these things take time.
That said, you should plan out how you want to invest. Meaning, do you want to invest a lump sum and divide it across multiple asset classes (i.e., stocks, bonds, and real estate)? Or do you want to start small and have a path forward for how all “new money” will be allocated to those asset classes? Above all, pay yourself first by automating your investment contributions.
Diversifying your portfolio also means examining market capitalization, or market cap, which directly reflects the size of the company and, in most cases, the asset prices. It’s a good idea to have a mix of small- and large-cap companies.
If you choose passive investing, you can purchase assets and hold onto them without watching the market too closely. However, if you want to manage your portfolio with a hands-on approach, you will want to look at the top investment strategies for active investors. Active investors typically buy and sell index funds to keep up with the market.
Some active investors prefer hedge funds over individual investing. Hedge funds involve pooling money from several participants, with a portfolio manager that controls the funds and makes investment choices. This type of investing also uses more advanced trading techniques like leveraging and short-selling
Ideally, you want a mix of active and passive investing to allow you to seize opportunities when they arise.
4. What if you just want to keep it simple?
To keep it simple, you could, in theory, do all of this through stocks and stock-funds. For example, you could buy stocks to invest in, but then buy funds that hold investments related to a specific asset class – such as cash equivalents or real estate. That would get you exposure to those asset classes without actually owning them.
You can explore the different asset classes with your online broker to learn which ones work best for your portfolio. For instance, using an online broker like Wealthsimple Trade or Questrade, you can search for the fund you want to invest in.
Let’s say you want to invest in real estate and you’ve found The Vanguard FTSE Canadian Capped REIT Index ETF (VRE.TO). Just type in the ticker symbol (VRE.TO) in the search bar and be brought to that investment’s main information page, where you can choose to buy shares quite easily from that point.
Option 2: Investing with a Robo advisor
A financial advisor can help you determine which assets present the lowest risk for you, but that comes at a price. If you’re just getting your feet wet in the investing world, you may want to try using a robo advisor instead.
Robo advisors, like , use algorithms to diversify your portfolio based on your answers to their investing questions. They also charge a lot less than financial advisors – typically less than 1% compared to the usual 2-3% with a financial advisor. Plus, you can take advantage of our exclusive promo offer: open and fund your first Wealthsimple Invest account (min. $500 initial deposit), and deposited into your account. Read our Wealthsimple review to learn more.
Using a robo advisor will save time and energy, but your asset class options will be more limited. Depending on the portfolio type you choose, you’ll have a certain blend of stocks and bonds. While the ETFs offered by Wealthsimple don’t necessarily include real estate, cash equivalents, or other types of asset classes, those investment types are embedded within the ETFs themselves. For example, the Vanguard Total US Market ETF will have broad exposure to US-based stocks, many of which include real estate.
Every investor’s portfolio looks different, as everyone has different goals and risk allowances. By starting with a robo advisor, you put yourself in a position to get the maximum gain from your portfolio, no matter which asset classes you choose.
The Last Word
To summarize, investing in asset classes is an important skill to build up if you want to become a savvy investor. This article should give you the key things you need to know, but for a deeper dive, read our guide on how to start investing and how to buy stocks.